February 25, 2010 / 1:36 PM / 9 years ago

UPDATE 3-Dr Pepper seen getting windfall from Coke deal

* Q4 EPS $0.44 tops Wall Street view $0.43

* Sales down 1.5 pct; volume up 4 pct

* Sees FY shr $2.27-$2.35, with sales up 3-5 pct

* Board authorizes additional $800 mln in buybacks

* Shares up 11.3 pct as Coke deal could bring big cash (Adds comments from Dr Pepper, Coke CEOs, updates stock move)

By Jessica Wohl

CHICAGO, Feb 25 (Reuters) - Dr Pepper Snapple Group Inc DPS.N benefited from news that Coca-Cola Co (KO.N) plans to take control of its top bottler’s North American operations, as analysts said it could reap nearly $1 billion from the deal.

The Coke announcement on Thursday [ID:nN25236905] pushed shares of Dr Pepper up more than 11 percent to an all-time high, and overshadowed the company’s report of a better-than-expected quarterly profit.

Dr Pepper is getting a $900 million payout due to a similar deal as PepsiCo PEP.N buys its two largest bottlers.

Analysts estimate that Coke Enterprises CCE.N distributes about 27 percent of Dr Pepper’s carbonated soft drinks in North America and believe Coca-Cola Co would need to make the same kind of arrangement as Pepsi to license Dr Pepper brands.

“The big winner in this could be Dr Pepper Snapple, which could net another big cash pay day,” JP Morgan analyst John Faucher said in a research note. “The payment could be near PepsiCo’s $900 million payout, and it should lead to further non-cash earnings accretion and even more cash to buy back stock.”

If Dr Pepper arranged a similar deal with Coke, the payout could be roughly $1 billion, Consumer Edge Research analyst Bill Pecoriello said in a research note.

Dr Pepper CEO Larry Young said the Coke-CCE deal showed the growth potential of the North American market, but it would be “premature” to comment on the transaction and any talks with customers or potential customers.

Dr Pepper’s distribution agreement with CCE is structured similar to those with the Pepsi bottlers being acquired by PepsiCo, Young said on a conference call.

Coke Chief Executive Muhtar Kent would say only that Coke and Dr Pepper had discussed the issue.

“All I can tell you is that I have talked to Larry Young, and we are going to be talking to him going forward on that issue,” he said on a separate conference call when asked about a possible payment to Dr Pepper.

Dr Pepper plans to use funds from the PepsiCo licensing pact to reduce debt. It also said its board authorized the repurchase of an additional $800 million share buyback.


Lower packaging, ingredient and transportation costs helped Dr Pepper alleviate the impact of sluggish sales in the latest quarter, and the company said this year’s earnings should come in stronger than analysts had anticipated.

“I’m cautiously optimistic we’re seeing a little uptick, a little more positive (sentiment) out there,” Young said, adding he expected that to improve over the course of 2010.

The maker of Dr Pepper, A&W, Sunkist, Canada Dry and 7UP beverages earned $114 million, or 44 cents per share, for the fourth quarter, compared with a loss of $621 million, or $2.44 per share, a year earlier, when results were hit by charges.

Sales fell 1.5 percent to $1.36 billion, but were flat stripping out the impact of currency and the fact it no longer distributes Hansen Natural Corp HANS.O beverages.

Analysts, on average, had expected Plano, Texas-based Dr Pepper Snapple to earn 43 cents per share on close to $1.4 billion in revenue, according to Thomson Reuters I/B/E/S.

Volume rose 4 percent. Strong concentrate sales to third-party bottlers ahead of a January price increase added about 2 percentage points to sales volume growth.

Carbonated soft drink volume rose 4 percent, though Dr Pepper volume fell 1 percent. Fountain foodservice volume fell 6 percent, as fewer people visited restaurants.

The volume of noncarbonated drinks sold rose 5 percent, but super premium tea remained weak, the company said.

Dr Pepper Snapple, which went public in May 2008, also said it expects to earn $2.27 to $2.35 a share this year, with sales up 3 to 5 percent. Analysts were expecting a profit of $2.24.

Dr Pepper shares hit an all-time high of $31.90, and were still up $2.07, or 7.2 percent, at $30.72 in trading on the New York Stock Exchange. (Additional reporting by Ben Klayman in Chicago and Martinne Geller in New York, editing by Gerald E. McCormick, Dave Zimmerman and Gunna Dickson)

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